A recent ruling by an Illinois court has lawyers and billing experts wondering whether physician practices need to rethink the extremely common arrange­ments under which they pay billing companies a percentage of the payments the billing company collects on behalf of the physician practice.

In the case, Center for Athletic Medicine, Ltd., v. Independent Medical Billers of Illinois, Inc. and Medorizon, Inc., the Center for Athletic Medicine, a professional corporation of physicians, sued its billing company in 2005 for breach of agreement. The Circuit Court of Cook County dismissed the case. It agreed with the billing company that the contract between the company and the Center for Athletic Medicine was void because it constituted “improper fee sharing,” a violation of the state Medical Practice Act. On May 28, 2008, the Appellate Court affirmed the dismissal.

While the ruling affects only Illinois physicians and billers, it does raise concerns for physician practices elsewhere, because all 50 states have laws banning fee-splitting, says Jack Bierig of the Chicago law firm Sidley & Austin LLP. Yet the percentage-of-payments arrangement is extremely common.

“The way it works is that the pathology or other physician group will hire a billing company to send out and collect its bills, and the payment is often a percentage of total fees collected,” Bierig explains. “The aver­age person might ask what’s wrong with that. For example, a restaurant leasing space from a landlord might pay a base rent plus X percent of the restaurant’s revenues. That way, if the restaurant does well the landlord shares in the good result; if the restaurant does poorly, then it doesn’t have to pay as much.”

In the health care field, because of the complexity of medical billing with its multiple-party contracts, “denial management” has become a normal part of the processing of claims. Rebecca Busch, an expert hired by the Center for Athletic Medicine, describes denial management as a “back end service” that is entirely focused on maximizing payment of medical bills by insurance companies and patients. In an affidavit filed before the court, she said that “the practice of billing a percentage of amounts collected for the submission of bills, denial management, and advocacy for the consumer has long been established as the most appropriate protocol.”

On the other hand, genuine fee-splitting, as opposed to the practice at issue in the Center for Athletic Medicine case, raises conflict-of-interest issues, Bierig says. “The sort of fee-splitting arrangement against which the prohibition is directed might be a situation in which a cardiologist offered an internist 25 percent of the bill­ings from patients referred by the internist to the cardiologist.” In this scenario, referrals are based on the amount of money a referring physician gets, rather than on the quality of the person to whom the referral is made. “So you can see why that would be a bad practice and there would be reason to prohibit it,” Bierig says.

In this particular case, the Center for Athletic Medicine argued that public policy considerations behind the fee-splitting prohibition—preventing the influencing of referral and patient care decisions based on motivations unrelated to professional judgment were not implicated by the agreement, because the billing services dealt with insurance companies only after the medical decisions had been made and treatment provided.

It’s difficult to see why an arrangement where a pathology company says, “You prepare and send out the bills and I’ll pay you X percent of what you recover,” would be questionable, Bierig says. Speaking very literally, that could be called fee-splitting, “but in my judgment, that’s not the kind of practice that the prohibition against fee-splitting is designed to address.”

The literal interpretation, however, was the one the Appellate Court chose. It asserted that the motives involved or the widespread adoption of the billing practice were not pertinent. “In determining whether an arrangement constitutes prohibited fee splitting, the fact that the purpose behind the parties’ agreement may have been benign is of no relevance,” the Appellate Court said. “In this case, the agreement results in fee splitting and is void, irrespective of the purpose and common practices involved in medical billing agreements.”

Doug Knapman, CAP’s director of practice management, says percentage arrangements are typically based on net collections, “so the billing company is motivated to become as efficient as possible in collecting legitimate reimbursements.” Under rules of the Centers for Medicare and Medicaid Services, he notes, if parties maintain a percentage ar­range­ment, the billing company cannot receive the dollars. Payments must be received directly by the physician, which is commonly accomplished by having payments directly deposited into the physician’s bank account.

“From a billing standpoint, the easiest thing for a billing company to do is receive the charges, create a claim, send it out, and if the money comes back, they consider themselves done,” he explains. “If that is all they do, it’s a bad billing company.”

“Better billing companies process denials and attempt to fix the problem.” For example, he says, since pathology groups typically get insurance information secondhand from ordering physicians’ offices or hospitals, it’s not uncommon to have incorrect patient information for a certain percentage of claims. When a denial is received because of incorrect insurance information, the billing company would try to obtain the correct information.

Additionally, billing companies collect co-pays and deductibles from patients. “It starts to get less profitable for the billing company when they have to persist,” Knapman notes. “But what people really hire billing companies to do is to not only generate charges but also to deal with denials and collections.”

In Knapman’s view, it is actually billing companies that might be more concerned about the implications of the Center for Athletic Medicine case. “The percentage is based on net receipts, which are dollars coming in, less refunds. Refunds can occur for a variety of reasons. For example, a patient mistakenly says he has Insurance A when he actually has Insurance B, but Insurance A hasn’t updated the records. It pays the claim but then comes back, saying, ‘Actually that’s not our subscriber and you need to refund the money.’”

“The good billing companies like this type of percentage arrangement, because they can influence their own income by improving processes or by doing a better job.” But from physicians’ standpoint, “if you are just paying a flat fee for bills sent, you are going to have to manage that relationship much more. How do you construct a contract that builds in incentives for the billing company to perform?”

Robert Burleigh, president of Brandywine Healthcare Services, West Chester, Pa., and a consultant to the billing industry, says, in his experience, only a few companies charge on a per-claim basis. From the billing company’s perspective, “it means the physicians are paying for it to do work and the prospect of their getting paid themselves is a side issue. They would consider it to be like any other employee arrangement.”

While there are no exact data on the proportion of pathologists who outsource their billing as opposed to doing it in-house, he estimates from his experience that the percentage is more than 50 percent, which is comparable to other hospital-based specialties including emergency medicine, radiology, and anesthesiology. Percentage arrangements are “nearly universal throughout the country,” Burleigh says. “And that’s not driven by the billing companies; it’s driven by the customers, the physician practices.”

Burleigh, who frequently testifies as an expert witness for defendants and plaintiffs, refers to the Independent Medical Billers’ approach to its client’s complaint as a “poison-pill strategy.”

“Rather than argue the merits of the case, they chose to defend themselves by saying that contract is invalid. But if we assume all their other contracts are based on a percentage, that would theoretically—although we don’t know it with certainty—put all of its contracts under some kind of cloud.”

What this Illinois case might mean for physicians in other states is uncertain. While every state prohibits fee-splitting, Illinois and New York are the only two where fee-splitting language has been raised as a possible issue in billing contracts.

“This isn’t some ‘big deal’ trend; this is an anecdotal trend in Illinois,” Burleigh says. The state medical society, he notes, has helped develop specific legislation, which has already been introduced, that would allow percentage fees in Illinois, creating an exception to the fee-splitting law.

“Let me add that in New York, where all the billing companies charge a percentage because their customers prefer it,” he says, “the state has never once issued a ruling or sought to enforce the fee-splitting prohibition.”

There are at least a few possible alternative arrangements by which physician groups could avoid the legal difficulties the courts found with the Center for Athletic Medicine case, Bierig advises. These could include payment of a flat fee based on the number of bills sent out, or adoption of a “stepwise” function. “You could either pay the firm by the hour, or you could say, ‘Okay, if collected billings are X, then we’ll pay Y; if they’re more, then we’ll pay Y plus something else.’ So there’s not a direct one-to-one function between the billings and the payment.”

“You could say, ‘We’ll pay you X dollars down; we expect the fees this year to be in the vicinity of such and such and we’ll pay you Y dollars. But if it turns out to be up to a certain figure, then we’ll pay you a specified additional amount.’”

Whether or not an alternative arrangement is called for, pathologists need to be aware of this decision, Bierig says. Where billing arrangements are agreed on, “the concern is you don’t want pathologists being exposed to the charge that they’re violating the state Medical Practice Act, or that the contract was void. You want to make sure, when you’re structuring the contract, that it’s not subject to challenge either by the state or by one of the parties.”